Nov 13, 2014

Cornish was the CEO of Coventree, a niche investment bank with dealings in the asset-backed commercial paper (ABCP) market. The ABCP is a relatively opaque market; as such investors rely heavily on a company’s credit rating. Coventree was the only public asset securitization firm that operated in the ABPC market in Canada.

Coventree received a letter from DBRS, a rating agency, in January of 2007. The letter gave notice of an upcoming change in credit rating methodology that would be applied to a specific area of arbitrage transactions. Effectively this change would limit the company’s ability to operate within a profitable area of its business. The January letter was mentioned in a press release, and MD&A in February and May respectively. The market did not demonstrate a strong reaction. The market collapsed on August 13, 2007. Investors were left with illiquid, devalued assets. On August 14, 2007 a material change press release was published and the share price dropped.

The case turns on whether the letter is a material change; was Coventree required to disclose forthwith the company's receipt of the January DBRS letter and the effect of the letter on the company.

The Court made a number of pronouncements on the principles of materiality. Lack of a movement in market price does not require a Court to find that the matter could not have been material. On February 14, 2007 Coventree mentioned the DBRS January letter in a press release, and on May 14, 2007 in it’s MD&A. The share price did not react strongly to either disclosure document. The absence of a market reaction to the information does not exculpate the company. The disclosure was inadequate. “Given the opaque nature of the market and Coventree’s failure to explain the impact of the DBRS January release on its business and operations, the commission found that the market price, could not and did not, reflect the effect of the DBRS announcement on Coventree’s business and, by necessary implication, the value of its shares”[1]

The occurrence of a material change triggers a reporting issuer’s timely disclosure obligation. The material development is to be disclosed without delay, regardless of whether financial impacts are to be incurred only in the future.

Materiality is to be assessed objectively. The Ontario Securities Commissions (“OSC”) did not rely on hindsight to draw its conclusions. The Commission properly used the market impact test, and not the reasonable investor test.

The Court upheld the OSC’s interpretation and application of the test for “material change” under s. 75 of the Ontario Securities Act. The Commission found that Coventree did not comply with its obligation to disclose material changes as a reporting issuer under s. 75 of the Ontario Securities Act, by failing to issue a press release when DBRS changed its credit rating methodology.

The Commission found that material changes included: (a) inability to issue new ABCP; (b) difficulty rolling outstanding ABPC, (c) ABCP spread widening; (d) credit default swat spread widening (e) sales of assets. Here the Commission comments that an investor would consider the undisclosed information to me “critically important” in making an investment decision.”[2]


[1] Cornish v Ontario (Securities Commission), [2013] ONSC 1310 (Div. Ct.), at para 20.

[2] Cornish v Ontario (Securities Commission), [2013] ONSC 1310 (Div. Ct.), at para 21.